The Security Market Line (SML)relates risk to return, for a given set of market conditions. If the risk-free rate increases, which of the following would most likely occur?
A)The market risk premium would increase.
B)Beta would increase.
C)The slope of the SML would increase.
D)The SML line would shift up.

Question

Quizplus · Accepted Answer

If the risk-free rate increases, the return required for bearing risk increases as well. As a result, the overall return for equity investments increases, and the SML line shifts up. The slope of the SML line does not change, and the market risk premium and beta are not directly affected by changes in the risk-free rate.

The Security Market Line (SML)relates Risk to Return, for a Given